Burning Rock Biotech (NASDAQ:BNR) Q4 2021 Earnings Call

0:00 This presentation contains forward-looking statements. These statements constitute forward-looking statements within the meaning of the Section of 21E of the Securities Exchange Act of 1934, as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, target, confident, and similar statements. Burning Rock may also make written or oral forward-looking statements in its periodic reports to the SEC and reports to shareholders in press releases and other written materials and in oral statements made by the officers, directors, or employees to third parties. Statements that are not historical facts include statements about Burning Rock's believes in expectations of forward-looking statements.

1:00 Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risk, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond Burning Rock's control. Forward-looking statements involve risk, uncertainties, and other factors that could cause actual results to differ materially from those contained in any such statements. All information provided in this presentation is as of today and Bernie Rock does not undertake any obligation to update any forward looking statements as a result of new information, future events, or otherwise, except as required under applicable law. I would now like to hand the conference over to your speaker today, Mr. Han, CEO.

1:54 Thank you. Welcome to Burning Rock 2021 Annual Conference Call. I'm Yusheng Han, the CEO and founder of Burning Rock. And today we have our COO, CTO, and CFO in the meeting. So let's turn to the page three first. And I will recap the highlights of 2021 and our recent progress. Then I will go through the outlook of 2022. After that, our COO, Shannon, will elaborate on our product line, especially early detection and MRD. Then our CFO, Leo, will work you through the financials. The Burning Rock started with the therapy selection business in 2024 and has grown to the market leader in this segment.

2:46 The leading position has laid a good foundation and given us advantages moving forward to new business of early detection, MRD, and pharmaceutical collaboration. We have strong branding on our technology and product quality which help us attract talent. In the network we have built across thousands of colleges and hundreds of hospitals enable us rapid initiation of R&D starters on new products such as as well as fast distribution when they go to the market. The existing high testing volume makes it possible for us to continue lowering the cost. that's why we aim to tackle the therapy selection, MRD, and early detection market in parallel in the coming few years.

3:33 Let's turn to page four and recap our 2021 and recent progress. For therapy selection, we recorded 38 volume increase in 2021 and reached 70K units despite of the COVID influence. And in-hospital model growth was and Xiaozhi Hu, Xiaozhi Hu. We have talked several times about our tumor-informed MRB technology via profit.

4:28 It has shown very promising performance with the sensitivity on par with what has been shown in Matara and Archer's publication. And we have some exciting readouts that will be released in AACR, and Shannon will elaborate more on that. For pharma collaborations, the growth trend continues, and new contact value reached are the 183 million in 2021, which is 5.7 times versus 2024 year. In terms of early detection, the nine cancer test development is on track, and the first large cohort will read out in 2022. The commercialization of six cancer early detection is almost ready.

5:18 We will collaborate with our partner hospital to start commercialization once the COVID lockdown is released. And let's turn to page five. In page five, I will talk about what we can expect in 2022. For therapy selection, new product line will start to contribute revenue, including DetermineX, which we license in from OncoSight, and MyChoice HRD Plus, which we license in from Mirage. The trend of in-hospital model growth will continue with more new contract of hospital and more type of product contracted with existing hospitals.

6:03 With the growing top line, we expect the operation efficiency of therapy selection better than before. For MRD, we launched the commercialization in March based on the solid data we have accumulated. The initial feedback from the market is quite positive. And as I said one minute ago, we will release the data on lung cancer baseline and ASDR and additional studies in other types of cancers are under planning. The business of pharmaceutical collaboration will continue to grow and contribute higher value to our revenue this year.

6:49 For early detection, we have two large product development studies going on, each over 10,000 subjects, which you might have already known. And the first intent of EU's population, multi-cancer interventional study in China, will launch in China. Then let's turn to page six. I'll spend probably one minute explaining the meaning of the new approved 19K. Although it's still a small panel, it's a very minimal step compared with existing approved panels. First, the DNA input is only 30 nanograms, which means that much lower than all the other capture sequencing base kit, meaning it can be applied to small samples from pulmonary puncture biopsy.

7:44 and the second meaning is that it's the first case that copy number variation is approved and the gene mat is included in that. And also, it's a case with open side detection of fusion. So, that's basically the overlook of 2022. I will turn to Shannon about the product line development. Thank you. Okay, thank you, Yusheng. So let's move on to page 8. This is the overview of our early detection product development roadmap. This might look very familiar to you because we have actually shared this map for quite a few times in the past calls. So the overall program stays the same as previously communicated, where our six cancer products have entered commercialization.

8:43 and now the development and validation work are now heavily going on for our nine cancer products. And then if we go to page nine, here we have a little bit more on details. In the most recent few months, we have two particular updates I think are worth mentioning. First, on our six cancer products, During our last quarter's call, I think we talked about the prospective and interventional studies on intended use population that we were planning on. So we are now happy to share that this study, which is now named PREVENT, has most recently obtained approval from the Human Genetic Resources Administration in China, and so it's now ready to start approval.

9:35 And the second thing we want to share is that we had our first data readout on the night cancer product from the case control pilot validation study called PROMIS. The performance so far looked quite promising. Since the statistics are still being summarized and finalized, we couldn't share more details right here, but we are submitting the results from PROMIS to the ISMO conference this year, so please stay tuned on that if you're interested. And also on a side note, the PREDICT study, which we have talked about many times, it's a larger scale, two-phase case control cohort study. It was expected to have some data readout later this year.

10:21 However, due to the recent COVID situation in China, we are having a mild delay on the enrollment speed, and we now expect to complete enrollment for PREDICT phase one in a few months. and we will have the data readout in 2023. So now let's go on to page 10. This page lists our publications on our early detection technology, also SEEK. At the bottom are some new information which are our two most recent posters which will be shown in the upcoming AACR conference. And on page 11, Here, we show a little bit more detail on one of the posters.

11:06 In this poster, we well-released part of the analytical validation data for apoptosis zinc in six cancers. And we were able to demonstrate a limit of detection between 0.02% and 0.11% across different cancer types. Again, we invite you to pay close attention to our posters in ACR if you're interested. So now let's actually skip the next couple pages and jump to page 15 directly. And I would like to spend some time to talk about our progress on MRD. First of all, this graph on page 15 actually comes from an interesting review article from DocSmack DM on MRD applications on solid tumors.

11:57 I think they are a good demonstration on the evolving The main message here is that MRD can potentially be used in two clinical scenarios. The first one is the so-called landmark analysis, where MRD status is assessed right after operation or other curative therapy for cancer patients. It serves as a highly significant predictor for prognosis. and almost unanimously in all studies across all cancer types this utility was proved again and again. The second is the so-called surveillance analysis where MRD status is assessed longitudinally and repeatedly along the way. The plausible hypothesis here is that such monitoring through MRD tests may be able to flag relapse events ahead of time before radiological science however that an earlier intervention based on MRD monitoring can lead to survival gain in the end is actually far less clear than the prognosis prediction effect itself and it has been there has been some reasons of conflicting conclusion published you know on the surveillance analysis utility so there's more debate on that and then on page 16, the InVigor 010

13:31 study shown here in our opinion is a very important study to demonstrate clinical utility of MRD beyond prognosis prediction based on the landmark analysis. Because in this study it was shown quite clearly even though from a retrospective analysis that only MRD positive patients benefited from the adjuvant immunotherapy but not the MRD negative patients. Of course, more evidence needs to be generated, and we're also seeing some conflicting data, such as from Empower 0410, so still a long way before a full consensus can be reached on MRD utility and industry standards. Nonetheless, it has shown great promises, and in Burning Rock, we are also actively collaborating with Chinese clinicians to validate our MRD technology and establish utility for our MRD products.

14:25 On the right side on page 16 is a consensus on MRD applications for lung cancer by Chinese clinicians led by Dr. Li Yilong. And this was developed and published about exactly a year ago. So this is an example to show the fast adoption of MRD by Chinese doctors. And we are witnessing right now similar consensus being discussed and developed in other cancer types such as colorectal cancer. So let's skip page 17 and go directly to page 18. We wanted to show you some of our own progresses. On page 18, we outline Burning Rock's development and validation works for our MRD products. In the upcoming AACR conference, we have two posters showing our first data readout on our personalized MRD technology called ER-Profit on lung cancer and colorectal cancer, respectively.

15:23 We have more details on the next two pages on that. In addition, as mentioned before, we have also launched our MRD product commercialization based on BR profit just a couple of weeks ago. So now I'll take a few minutes to talk a little bit about our MRD validation data itself. First on page 19, we compared our BR profit, which is again our personalized MRD approach with our fixed liquid biopsy panel on a group of lung cancer patients from the METL study. So very interestingly, we used both tumor-naive calling and tumor-informed calling for the fixed panels, and we compared both with the personalized approach.

16:11 So this is meant to compare and contrast whether and how much the personalized approach is more sensitive than the fixed panel approach. As you can see here, while both fixed panel and BR-PROFIT generated highly significant prediction for prognosis, BR-PROFIT was still indeed more sensitive because it identified more MRD positive patients at the landmark and also it showed higher relapse rate among MRD negative patients. I also wanted to point out that what's being shown on this graph are just a subgroup enriched for patients who relapsed. In the full medical cohort, which we just most recently had the data, the full medical cohort containing about 200 patients, MRD negative patients assessed by Bioprofit actually achieved a 12-month recurrence-free rate of greater than 95%.

17:15 So we were we are right now preparing for publishing this data somewhere later this year. So on the next page, on page 20, let's take a quick look on our data in colorectal cancer. Even though this is a smaller cohort, it showed similar results as in lung cancer. Their profits showed greater sensitivity than fixed panel approach when comparing their positive rate among preoperative baseline samples. And then for the landmark analysis, their profit actually showed greater specificity than the tumor naive calling approach. Again, we'll be able to show more details during our AACR poster presentation. So stay tuned if you're interested in more details. So now I'll turn to our CFO Liu to walk you through our financials.

18:10 Great, thank you, Shannon. And first, let's turn to page 22. We'd like to briefly recap the COVID situation in China. As we called back in November during our last quarterly results, COVID was spreading in China in late 2021. Despite that challenge, we closed the fourth quarter with strong volume and top line numbers, which we'll go through a little later. And heading into 2022, COVID impact in China did not go away. Despite that, we have strong numbers during January to February 2022. And we'll walk you through that as well. But the current wave in March is looking pretty severe. It is actually the worst I have seen since China imposed a nationwide lockdown back in the first quarter 2020 when and Xiaozhi Hu.

19:29 First of all, we think 2021 is a much better year compared to 2020. And going into the trends that we saw back in 2021, first, COVID disruptions and tightening or increased preference for hospitals to run NGF-based tests in-house has resulted in a stepwise change in the second quarter of 2021. In that quarter, we saw a strong jump in volumes in the in-hospital channel, and we saw continued strength in the in-hospital segments throughout the year. Looking then at volumes of the central lab channel, which is the green bars here, starting in the second quarter of 2021, the stepwise change in the industry that we just talked about led to headwind of our central lab volumes as more tests were shifted to the in-hospital format.

20:23 but notably Central Lab volumes turned to positive growth in the fourth quarter of 2021 and that trend improved further in January and February this year. So that turnaround is mostly supported by the new products that we launched which are highly differentiated in the markets in China. And looking at some of the numbers here for Central Lab, the volume growth of Central Lab was negative 10% year over year during the third quarter of 2021 that turned to a positive 3% during the fourth quarter and that further improved to 11% in January and February 2022 year-over-year. Then moving onto page 24, we list out some of the metrics for the in-hospital segment. In summary, we have achieved more share and outgrew the industry through the in-hospital format and our installed base, i.e., the number of hospitals that we have completed contracts and our booking revenues increased at a faster pace during 2021 compared to the previous years.

21:29 Then let's head to our financials on page 25. We closed the fourth quarter in a stronger position versus where we were when we reported our third quarter results earlier, sorry, back in 2021. We went through our volume metrics on page 23, so going into the revenue figures, and Xiaozhi Hu. Both quarters improved further in terms of year-over-year growth rate and sequential trend compared to the third quarter of 2021, primarily driven by our volume growth in each of the segments. First, looking at central lab, third quarter revenue was down 12% year-over-year. We turned that to negative 0.8% in the first quarter in the fourth quarter, and that improved further to positive single digits year over year in January and February combined in 2022. But as we noted earlier, regarding the COVID situation in China, we'd caution regarding the impact of the current Omicron wave in China.

22:29 So we, at the moment, we can't take the January, February's number as an indication for our first quarter. We'll need to see how large of an impact that makes and if there is any change to the COVID zero strategy in China. And as a side note, we have seen all antivirals arriving in China in the recent couple weeks, but there has been no official change of strategy that we have seen or sensed so far. Then second, looking at the in-hospital segments, we had a high base back in fourth quarter 2020. We recorded our best quarter for in-hospital for the fourth quarter 2021 We grew 25% in revenue terms or 62% in volume terms in the fourth quarter. We explained in our previous earnings call that volume metric leads revenue metric due to our billing and revenue recognition for the in-hospital channel.

23:26 We booked a majority component upon our customer receiving the test kits and we booked the remaining minority components when we receive payment. So generally, strong volume trends I would expect should drive continued revenue growth over time for the in-hospital segment. I should also mention the biopharma service segment, which is growing rapidly, coming off a small base though. We expect biopharma revenue to accelerate in 2022, driven by the rapid rise of project backlog that we have built during 2021, as Yusheng had called out earlier in a call. The next going to ASP and gross profit margin trends, these are broadly stable within each of the central lab and in-hospital channel. As we've noted before, in-hospital revenues are chunkier and can have quarter-over-quarter fluctuations, so it's more representative to look at margins of that segment over a rolling four quarters.

24:25 On that basis, it's largely stable over time. Then turning to our operating expenses, First, some context. During 2021, we expanded our organization in preparation for three business goals. Number one, accelerated in-hospital penetration for the patient testing business and new product launches. Number two, early detection clinical program execution. Recall that we have two large studies, each over 10,000 subjects currently ongoing. We are launching another 10,000 intended to use population interventional study this year, and number three, early detection commercialization. We're happy to see these efforts starting to bear fruit, particularly for item one and two. We are also happy to report that the organizational buildup that has been largely completed at the end of 2021.

25:21 So in terms of direction of travel going into 2022, we would not expect significant further headcount increases in 2022. As headcount is the largest component of our OPEX, we expect OPEX increase to slow significantly over the course of 2022. And translating this to numbers, our OPEX growth, excluding clinical studies, has more or less peaked on a sequential basis in the fourth quarter of 2021. In terms of year-over-year trends, we had a rising base throughout 2021, so the year-over-year increase will come down as well as we progress into 2022. Now I'd like to briefly touch on each of the OPEX lines. First, on R&D, the increase in fourth quarter 21 was primarily driven by good progress of our early detection clinical programs as enrollment and testing accelerated during the quarter and also driven by R&D headcount increase back in 2021.

26:21 Second, looking at sales and marketing, the year-over-year increase was 80% compared to the fourth quarter 2020. but if we strip out early detection-related and one-off items, so if we just focus on recurring items for our patient testing business, the rate of increase was about 40%. Going forward, as the customer and new product coverage build-out was largely complete at the end of 2021, we would expect sales and marketing increase to slow significantly in 2022. Along with continued top-line growth, we expect to see operating leverage on the sales and marketing line starting in the second half of 2022. Then looking at the G&A line, the increase was mostly driven by expansion of headcount and our physical footprint during 2021. A driver of the increase was our new early detection lab and office building, about 17,000 square meters in size, or about 183,000 square feet. In terms of outlook, the GMA line should generally follow our OPEX trend as we outlined a little earlier, i.e.

27:33 we're looking at improving operating efficiency for this line as well. Then turning to our guidance for 2022, our initial guidance for the year is R&B top line 620 million, an increase of 22% over 2021, This guidance includes new products from our cancer patient testing business, including our personalized MRD products, which we launched this month, and that is gaining good traction. The guidance does not bake in any early detection revenue, as we're still at an early stage of our early detection commercialization. Then lastly, looking at the cash balance, at the end of 2021, our cash equivalents plus short-term investments was about 1.5 billion RMB, or US dollars 236 million, which we think is sufficient for funding all our existing programs.

28:30 So with that, we'd like to conclude our opening remarks and turn to Q&A, please. Thank you. To ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Again, if you would like to ask a question, press star one on your telephone. Our first question comes from Max Masucci with Calvin & Company. Your line is open.

28:58 Hi. Thanks for taking the questions. First one on some of the licensed products. It sounds like the term RX is becoming a more meaningful contributor to revenues, so it would be great to hear about the adoption trends you've seen for DETERMA-RX and whether you see an opportunity to sign additional agreements like this to bring other NGS-based tests to a large Chinese precision oncology market.

29:35 Probex, on DETERMA-RX, we don't... Go ahead, Leo. Yeah, so on DetermineRx, we don't break out revenue or volume by individual products, but, you know, we had a good trend on DetermineRx, and it's not just DetermineRx. We also, as Yusheng called us at the start of the call, we also have another product from Milius on MyChoice Plus HRD score measurements. and that product is also receiving good feedback in the markets and our MRD product formally launched this month and it's also gaining good traction so we believe new product is going to be an important driver for this year and MRD we think has strong potential over a multi-year time horizon and there's a bit of synergy between MRD and C-TERMA regarding early-stage lung cancer patients.

30:39 So that's how we look at it. In terms of new products, we have an open mind, and we've been looking at products, but we also need to bear in mind how that product fits into the China market. We believe that the two we have in license make very good sense, having strong potential markets with strengths on the products having good validation data. So, you know, with that, we still apply that same framework when we look at potential products. So I guess that's, you know, we have licensing opportunities. That's great.

31:21 So moving on to, you know, the recent NMPA approval, we'd just be curious to hear You know, now that we have the official approval, you know, what sort of demand you're expecting for the use of, you know, LungCare CDX with biopharma partners and then also, you know, in the clinical setting and just curious if you're expecting prior users of the, you know, original first generation, the 2018 version of LungCare to switch over to the 9G kit.

31:58 So for the 19 kids, I mean, the first meaning is that for the bidding of each tender, it would take a lot of advantages. So for the in-house leader model, I mean, that with officially approved kids from NMTA is critical, and most of the time, the parameters of the kids are important. So we think that the 9G kit will add a lot of competitiveness of our existing affiliate line. And in terms of pharmaceutical collaboration, I think, yes, we think that the companion diagnostic by the effort of both pharma and diagnostic company will bring a better future to the market. So the demand, I think we have already talked about several times, after the amendment of the requirement from NMPA, the companion diagnosis need is significantly increasing.

33:14 And that will accelerate to the pharmaceutical collaboration as well.

33:21 That's great. Final one for Leo. You know, it's been over two years. We have over two years of experience with COVID so far. So it was nice to hear some of the trends that you've seen in terms of the bounce back once the downs are lifted. So it sounds like there's still some major disruption here in March. But just curious, as we look at the 2020 22 guidance, you know, how we should think about a rebound, you know, in your business as, you know, as the lockdowns are lifted, just based on the experience we've had so far.

34:04 Yeah. I think first, take a brief step back. We tried, in principle, we tried to break out COVID and ex-COVID impacts in the past, but you know conceptually we think that may not make sense because you know China so far has always kept a COVID zero policy in pace and as more infectious disease becomes the bigger impact it generates on the market. So despite that you know how we're looking at this is number one new product launches and number two taking share in the markets. and primarily that was done through the in-hospital strategy. So regardless of COVID impacts, we will want to do these two.

34:52 And if you look at our historical volumes, we were growing at high double digits before COVID hit China. So it's kind of hard for us to break out number quantitatively. Then looking at the guidance for 2022, we have built in an element of caution as we have seen the current impact on the ground. although we wait for any opportunity of how that might change or if the official COVID strategy in China might change, although it's too early to speculate at this stage. So we need to keep an enclosed eye on this. So as we execute and we progress into 2022, we'll keep you informed regarding the latest trends and our guidance.

35:42 Great. Thanks for taking the questions. Looking forward to the data at AACR. Thank you, Max. Thank you. And as a reminder, if you would like to ask a question, press star 1 on your telephone. Our next question comes from Alexis Young with Morgan Stanley. Your line is open. Thanks. Thanks for taking that question. I have two questions. The first one is actually a follow-up on the NGS approval. So we understand that in terms of the LBT-based market, the NGS market is actually quite crowded, but the registration pathway is actually very lengthy and unclear. So just want to better understand, like, what are the key hurdles that we have cleared while the other players are still working on...

36:37 so that we are able to obtain multiple registration certificates for the NGS kits. And if that's applicable to the registration of our future products, NGS and also even the early detection products in the outer years. And on top of that, if there will be any changes or thoughts on the commercial strategies now that these two products could be are officially on the hospital procurement list. This is my first question.

37:24 Sorry, I muted.

37:26 So if you look at the tenders of hospitals, usually the price will follow with some key parameters. such as the number of the genes, the type of variants that you can detect, and also other comments such as surveys and efficiency, I mean, the turnaround time. So, nine genes is quite competitive, is quite strong compared with the existing kits available in the market. as I said that it's the first case that can detect carbon number variation. And also, it's a nine gene testing which one of the most genes can be detected.

38:14 And also, if you look at the fusion, it's the first case with open detection of any fusion. So quite different from the several sites of fusion that can be detected by the other case. So we think that it's a strong product in the market. In terms of the future registration, to the audience, if you look at the company who are competing for the registration, it's not that crowded. Like probably just five to six companies have the competitiveness in the market. And people are competing for liquid biopsy and also are probably bigger panel.

39:02 And in terms of early detection, I think we, the registration of early detection, we talked to the NMPA as we reported. It's a totally new product type. And also we think that the conversation is encouraging. that multi-cancer early detection are certainly new in China. And about the technology, it's quite new from the other product. It needs an algorithm, quite complicated, calculating a score based on tens of thousands of sites, which is totally new to the NTA regulation. So we think that the future is bright, but we still need to do a lot of efforts and that is why we are launching the first big large-scale interventional study to add approval, to add some very important data for registration.

40:17 Does that answer your question? Yes, yes, thanks. My second question is related to the commercialization of the six cancer products and also the MRD products. So, yeah, the MRD obviously started commercialization recently, and our early detection is, I recall last time we said it's been contracting with a couple of hospitals, just wondering, like, While COVID may have delayed the sales for the moment, how is the hospital discussions so far? And any indicators that we should watch out for in terms of the initial sales?

41:06 Yeah, in terms of the hospitals, we talked to, I think it was three months ago, actually we have already signed a contract with them. But since it's a new one, after signing the contract, there's a lot of process we need to go through the hospital in terms of the volume in order to make the volume come up. And that needs our on-site employee to to collaborate with the doctors and nurses in the health check-up department. With the COVID-19, the most important thing is that people are forgetting about health check-up. They're locked in their home, and I think that it's quite easy to make conclusion that once the COVID come in, you never think that health check-up is the most important thing. That's why I think that's how we will start the commercialization once the COVID lockdown is released. But there are some numbers that I think that for the health checkup population, in a normal situation, the high-value

42:37 consumer will not be impacted a lot by the COVID-19. I think they will come back after the COVID-19. And for the MRD commercialization, it's only early stage of telling the effect. But since we launched in March, the response from the doctors are really quite positive. I mean the educational situation for MRD nowadays is different from what we can see like two years ago. Two years ago when we talked to the doctors, they would say that if MRD is positive, whether it means that my surgery is not as successful. And nowadays they will not say that because they have been influenced by the global opinion leaders they noticed that MRD is a very useful tool for them in the early stage consultation.

43:51 Honored to hear. Thank you. You're welcome. Thank you. Again, if you would like to ask a question, press the star, then the one key on your touchtone telephone.